The stock meltdown has made millions for a mystery trader betting that the market will go crazy

A trader has been betting for months on a large increase in the Cboe Volatility Index — or VIX — which serves as the stock market's fear gauge, and has been suppressed for most of the past year.

The volatility vigilante just rolled over a massive volatility bet that could pay out $262.5 million if all goes according to plan.

After months in the red, the market's most notorious volatility bull is finally turning a profit — and the trader has the market's ongoing meltdown to thank.

Known to some as the "VIX Elephant," the mystery investor has stubbornly clung to a wager that the Cboe Volatility Index, or VIX, will climb to levels not seen in the last couple years. And it's been a tough road since the trade was initiated in July, with the majority of that time spent slowly absorbing losses.

But the VIX has spiked more than 65% over the past six trading sessions, spurring a massive comeback of sorts for the Elephant, who has now made money, according to data compiled by Macro Risk Advisors. The chart below shows the trader's rocky ride, and very recent triumph.

But the Elephant's recent gains are just a drop in the bucket compared to the trade's full upside potential. If everything goes perfectly, the wager will yield an eye-popping $262.5 million.

That outlandish profit possibility has likely been the driving force behind the Elephant's decision to roll over the bet on four different occasions since first making it. That's involved rollovers on September 25, December 1, January 11, and most recently February 2 — this past Friday.

To better understand where the VIX Elephant is coming from, let's unpack the most recent rollover:

To fund it, the investor sold 262,500 VIX puts expiring in March with a strike price of 12.

The trader then used those proceeds to buy a VIX 1x2 call spread, which involves buying 262,500 VIX March calls with a strike price of 15 and selling 525,000 VIX March calls with a strike price of 25.

Bullish call spreads are used when a moderate rise in the underlying asset is expected. Traders buy call options at a specific strike price while selling the same number of calls of the same asset and expiration date at a higher strike.

In a perfect scenario, in which the VIX hits but doesn't exceed 25 before the March expiration, the trader would see a $262.5 million payout.

It is possible for the VIX to spike too much. If it increased beyond 35, the investor would start to lose money from the call spread, even though the direction of the trade was correct.

For context, VIX March futures are trading at 15.15, while the spot index traded at 18.45 as of 10:15 a.m. on Monday.

All data is from Bloomberg and was reviewed by a person familiar with the trade.

There are a couple of potential explanations for the trade. The first is that the trader decided that the prolonged low-volatility environment will soon be a thing of the past. And based on the events of the past week, price swings appear to be on the rise, supporting such a view.

It's also possible the investor is simply hedging a similarly large bullish position on the US stock market. After all, the VIX trades inversely to the benchmark S&P 500 roughly 80% of the time, so a spike in the fear gauge would almost certainly accompany some weakness in equities.

Regardless of the rationale, the VIX Elephant is closer than ever to the levels that would cash in a $262.5 million lottery ticket. If the market continues to sell off in earnest, you'd be hard-pressed to find a trader so poised to land on their feet.